Japan’s inflationary pressures surged again in July, with prices excluding fresh food and energy experiencing a wider increase. As the Bank of Japan’s policy meeting in September approaches, market expectations for another interest rate hike have strengthened.
According to data released by Japan’s Ministry of Internal Affairs and Communications on August 21, the nationwide Consumer Price Index (CPI) for July showed a 1.8% year-on-year increase in core CPI after excluding the volatile prices of fresh food, surpassing June’s 1.6% and aligning with market expectations. This index includes energy prices.
Although core inflation in July rebounded, it has remained below the Bank of Japan’s 2% target for seven consecutive months. Reuters pointed out that this is mainly due to government subsidies restraining fuel costs.
After excluding fresh food and energy prices, the CPI in July rose by 1.9% year-on-year, higher than June’s 1.7%. The Bank of Japan closely monitors this indicator to observe potential inflation trends.
Goods prices in July rose by 2.7% year-on-year, while the service industry price increase rose from 1.1% in June to 1.2%. Data indicates that companies are gradually passing on the rising labor costs resulting from tight labor markets.
Analysts project that as the previous elevation of wholesale inflation due to rising raw material costs further transmits, Japan’s core inflation may potentially rise back above the Bank of Japan’s 2% target in the coming months.
Masato Koike, senior economist at SOMPO Institute Plus, told Reuters that a renewed escalation of tensions in the Middle East could push up oil prices and, coupled with the yen’s weakness, may accelerate core inflation. He expects the Bank of Japan to raise interest rates in September.
In June this year, the Bank of Japan raised its policy rate to 1%, the highest level in 31 years. The July meeting maintained the rate unchanged but issued a stronger warning about the risks of upward inflation.
The next monetary policy meeting of the Bank of Japan is scheduled for September 17th to 18th. The market widely anticipates another interest rate hike at that time, raising the policy rate from 1% to 1.25%.
Sources revealed to Reuters that the Bank of Japan could potentially raise interest rates again as early as September and consider accelerating the pace of rate hikes thereafter, more aggressively than the current pace of about twice a year.